Audio 4:28
Record Chinese bank rates signal financial jitters

Michael JandaUpdated
Fri 21 Jun 2013, 6:41 PM AEST

The interest rates on short-term loans between Chinese banks have surged to record highs as the central bank largely declined to provide help to institutions to meet tougher banking regulations. The surge in the Shanghai Interbank Offered Rate, or Shibor as it is known, has sent further jitters through financial markets after yesterday's concern over the US Federal Reserve's indication that its stimulus program may start winding down later this year.

Transcript

BRENDAN TREMBATH: Global financial markets are under new pressure with the latest threat to stability coming from China - Australia's largest trading partner.

Interest rates on short-term loans between Chinese banks have jumped to record levels, sparking fears of a funding crisis for some of the smaller institutions.

But recent Chinese efforts to curb excessive bank lending have added to the malaise, according to Westpac's senior international economist Huw McKay.

HUW MCKAY: They have put in some regulations that has forced the banks to scramble and we're not only seeing the disturbances in the onshore market we're also seeing it in the market for foreign exchange.

MICHAEL JANDA: These regulatory changes have caused Chinese banks to demand more short-term loans. But with other banks doing exactly the same thing, there is no one left willing to lend them money.

HUW MCKAY: It's created a scurry from one side of the ship to the other and that's what we've seen in the interbank market, that's what we've seen in the foreign exchange market.

MICHAEL JANDA: This sudden tilt in demand for short-term cash has seen interbank lending rates hit record highs. The one-day lending rate jumped more than five percentage points to nearly 13 per cent yesterday. At one point during the day it briefly went as high as 30 per cent.

And, while lifting interest rates is a deliberate ploy by Chinese authorities to curb risky lending and make the country's growth rate more sustainable, financial risk analyst Satyajit Das says it carries the risk of unintended consequences.

SATYAJIT DAS: Unfortunately what might happen is this spike in interest rates and the shortage of liquidity will affect smaller institutions a little more than the central bank and dissipate with unintended consequences.

MICHAEL JANDA: Many of these smaller institutions are part of what's been dubbed China's "shadow banking" system - lenders that don't take customer deposits and fall outside most banking regulations.

SATYAJIT DAS: The borrow short-term from the major banks and use that to buy more risky products and the shortage of liquidity might create enormous problems for them.

MICHAEL JANDA: But Westpac's Huw McKay says there are plenty of savings in China to fund the banking system longer term, so the recent rate spike is likely to be short-lived and the central authorities won't let any large institutions collapse.

HUW MCKAY: They're not interested in anybody you know going to the wall. What we are seeing is a short term liquidity squeeze for certain institutions in a system which overall actually has relatively abundant liquidity.

MICHAEL JANDA: Satyajit Das agrees that the Chinese authorities have the capacity to save struggling lenders.

SATYAJIT DAS: In saying this, the Chinese central bank has a lot of tools, including being able to adjust interest rates and supply liquidity to ameliorate the most damaging effects in the short-term anyway.

MICHAEL JANDA: And there are reports that the Chinese central bank did actually come out with about $9 billion in short-term loans to one institution yesterday - late yesterday.

SATYAJIT DAS: Indeed, I think they have realised that perhaps this is having consequences beyond what they did intend and they're trying to backtrack.

MICHAEL JANDA: But Mr Das says there could be serious problems for the global economy, with a Chinese slowdown combining with a potential reduction of US Federal Reserve stimulus.

SATYAJIT DAS: If they do that, the US economy slows, that effects China. But also China's economy slows because of the tightening of liquidity, what we are going to see is that affect US businesses, which obviously have significant exposure to China.

And, it just shows how difficult it is going to be to co-ordinate across the world to withdraw the massive amounts of excess liquidity that the central banks have provided and which have provided a substantial measure of the economic improvement and also particularly the improvement in asset prices in financial markets over the last couple of years. Now we are more dependent than ever on cheap money.

MICHAEL JANDA: Speaking of debt and cheap money, many people wouldn't really associate China with large levels of debt but in the private sector that country does have substantial debts.

SATYAJIT DAS: Their debt has expanded from around about 125 per cent of GDP before the Global Financial Crises to close to 200 per cent of GDP.

MICHAEL JANDA: And a Chinese debt crisis with a flow-on effect of slumping commodity demand would be about the worst event imaginable for Australia's economy.